Buoyed by the increasing demand for diesel vehicles, the country’s largest car maker Maruti Suzuki India Limited (MSIL) on Saturday announced an investment of Rs 1,700 crore to set up a new diesel engine manufacturing unit at the company’s facility in Gurgaon, Haryana. The company will invest an additional Rs 900 crore in Rohtak to beef up research and development (R&D) facilities.

In a meeting held on Saturday, MSIL’s Board of Directors approved the setting up of the new unit, with an initial capacity of 150,000 units per annum. The unit will go onstream in 2013. In the second phase, production capacity would be expanded to 300,000 diesel engines by 2014.

“In the first phase, we will invest Rs 950 crore. After that, we will double the manufacturing capacity to produce 300,000 units per year by 2014. This will entail a total investment of Rs 1,700 crore,” said R C Bhargava, chairman, MSIL.

With the Finance Minister allaying fears of imposition of an additional tax on diesel vehicles in the Union Budget tabled last week, automobile manufacturers have begun to pull out all stops on their proposed investments in diesel engine facilities.

While Maruti Suzuki on Saturday approved the new unit in Gurgaon, rival Hyundai Motor India Limited (HMIL) is giving finishing touches to its plan to set up a diesel engine unit in Chennai. Likely to be set up at an investment of Rs 400 crore, the facility will have an installed capacity of 150,000 units per annum.

With petrol prices rising five times in the current financial year, the difference between the two fuels now stands at a whopping Rs 25.51 per litre, up from Rs 10 in April 2010, resulting in an increasing number of consumers opting for diesel cars. According to industry estimates, in the current financial year, the sale of diesel vehicles has grown by a whopping 35 per cent to account for over 47 per cent share of overall sales in the passenger vehicles segment.

Bhargava informed, “Petrol car sales have declined by 15 per cent in the current financial year. In the coming year, we are trying to bring down this decline to six per cent, but still we will be selling about 50,000 petrol cars less. We currently have 40 per cent of petrol engine capacity lying idle at the Gurgaon unit.”

In 2012-13, with 100,000 diesel engines coming in from Fiat for Maruti Suzuki, diesel vehicle sales are expected to go up by over 60 per cent to 400,000 units. The company is expected to close the current fiscal with sales of 240,000 diesel vehicles. “With both petrol and diesel cars, we are expecting an overall growth of about 10 per cent in FY13,” Bhargava said.

Maruti Suzuki has a sourcing agreement with Fiat for supply of 100,000 diesel engines annually till 2014. The company is ramping up capacity to produce 300,000 diesel engines at Suzuki Powertrain India Limited (SPIL) from 240,000 units now. MSIL’s Gurgaon plant produces all of its petrol engines. It has an installed annual capacity of 720,000 units that the company managed to stretch to 1.3 million units.

Maruti Suzuki on Saturday additionally approved an investment of Rs 900 crore to beef up R&D facilities at its centre in Rohtak (Haryana).